Robinhood's Risk Profile Could Be Worse Than You Think

Robinhood (NASDAQ: HOOD) was just selected as one of two companies to help launch Trump accounts, which are intended to introduce young children to investing. That fits very well with Robinhood's focus on bringing new investors into the market and could give it a leg up on the customer acquisition front. However, it highlights something that Robinhood shareholders need to keep in mind when they own this innovative broker.

Robinhood changed the brokerage industry

Robinhood is probably best known for its free commissions. That simple decision led to significant customer growth and forced discount brokerage competitors to change their commission structures, too. It was a major industry disruption pioneered by a digitally native company that leaned heavily on younger customers.

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Robinhood hasn't slowed down at all when it comes to innovation. For example, it was quick to add prediction markets to its product and service offerings as they became popular, which also allowed it a backdoor into sports betting. And while some of its tactics haven't worked as well as others (gamification, for example), it has grown its business very rapidly and now easily competes with the largest discount brokers.

Robinhood skews young

Given all of the company's success, it is easy to overlook a problem that shouldn't be ignored. Robinhood has only existed as a public company since 2021. The business hasn't experienced a single bear market in the public sphere, let alone a deep bear market like the Great Recession or the dot-com crash. It is easy to do well when all you've known is a bull market, which is true of both Robinhood and its customers.

Estimates peg the average Robinhood user's age at 31, higher than it used to be, but still fairly young. And the company states that a key goal is to introduce investing to people who have never invested before. Since new and young investors have only invested in markets that have generally risen, there's no way to know what will happen when they face a long and painful bear market.

If history is any guide, many of Robinhood's customers will be scared out of the market in the event of a deep and lingering downturn. And they may never come back. Since the discount broker hasn't been public through a deep bear market yet, there's also no way to know how it will handle such an adverse change in its business.

Don't be lulled into complacency

Robinhood has achieved a lot in a very short period of time. That is impressive; however, if you are a long-term investor, you shouldn't ignore the risk that a deep bear market could materially alter the trajectory of this still-young discount broker's business.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.